Coronavirus, and the ensuing economic impacts it has generated, continue to affect both lives and livelihoods globally. The damage it has caused to businesses and economies becomes more evident with every passing day. Forecasting institutions estimate Europe’s GDP contracted by -3.6% in Q1 2020 and a higher average risk cost is expected compared to previous crises.
These economic impacts of COVID have negatively impacted business credit due to the unfamiliar environment lending institutions are faced with as lockdowns are lifted. Caused by a need to monitor credit risk in a time of limited visibility and access to reliable data, the emergence of new approaches for the underwriting and monitoring of credit has adversely affected its availability in a time when businesses, particularly SMEs, need it most.
Effects on Business Credit
The COVID-19 crisis has triggered several specific credit-risk problems in the business environment, this refers to the general possibility of loss resulting from a borrower’s (i.e. business’s) failure to repay a loan. An inability to repay loans acts as a blemish on a business’s credit history and diminishes their creditworthiness – which is harmful to their interest of being able to secure future loans to stay afloat during the pandemic’s wake.
Not only this, but banks were faced with a difficult task of accurately assessing a business’s creditworthiness properly in the context of the crisis when numerous variables specifically made this task more difficult. Given that some sectors benefited in the crisis, such as food distributors (who struggled to meet rising demand), whilst others such as tourism and hospitality suffered, the task of concluding whether a borrower was in trouble became convoluted.
Further, the traditional sources of data that were typically used to assess a business’s credit-risk became redundant overnight. The data lenders relied upon in the past were no longer useful in evaluating an individual borrower’s resilience as it was six to twelve months old, when immediate, real-time data is required in order to make an informed decision.
An additional problem is that traditional methods of collection (i.e. letters, calls and emails) are becoming increasingly obsolete as customers and business preferences complete their decisive shift towards the digital medium. The coalescence of the pertinent issues has created a scenario in which supply of credit has been suppressed but demand has swollen, especially from SMEs.
For example, in the UK the Government offered the Coronavirus Business Interruption Loan Scheme (CBILS) to help SMEs access finance up to £5 million, but a spike in recent applications has put immense pressure on the already stressed lenders involved in the scheme. Over 100,000 applications are made a week to this fund from SMEs looking for capital to survive.
How to Stop it Hurting your Credit
As business owners struggle to stay afloat in the wake of the coronavirus crisis, they will need to keep an eye on their credit score. Whilst this may appear to be a small consideration in light of the other economic impacts of COVID, it could prove critical for those that need to borrow money or ask for credit.
Just as personal credit affects an individual’s ability to be approved for loans and other forms of personal credit, a business’s credit score affects its ability to obtain credit. A poor business score limits its opportunities as creditors may decide you aren’t creditworthy and are too risky to jeopardise their capital with.
During this economic crisis, as with others, lenders often tighten their criteria for loans. To maintain a strong business credit score during this downturn a few simple steps can be adhered to. Namely, check your credit report to ensure it’s complete and accurate, contact the reporting agency to correct any errors you may find.
Ensure creditors and net 30 vendors submit report your repayments to the three major business credit bureaus. If you are unable to pay the full amount that you owe on a business credit card, at the very least make the minimum payment on time – automatic payments are useful to make sure the due date isn’t missed.
The pandemic has crushed the supply of business credit yet causing the demand for it to skyrocket. Whilst the global efforts of governments to support businesses are helpful, they put pressure on the lenders involved and cause a tightening of the requirements for credit. If businesses require credit in order to stay afloat they must keep an eye on their credit history. Please see The Really Useful Information Company’s (TRUiC) website for more information on this subject.